Hawkish turn in US policy raises stakes for companies across the Middle East

03 Jul 2018

Creating a Resilient Organisation

MENA

Hawkish turn in US policy raises stakes for companies across the Middle East

US policy towards the Middle East is becoming increasingly confrontational. On 8 May, President Donald Trump withdrew from the Iran nuclear agreement, citing national security concerns, including those related to Iran’s policies in Syria and Yemen. On 14 May, the US opened its new embassy in Jerusalem. On 21 May, US Secretary of State Mike Pompeo presented the country’s strategy for Iran, confirming the Trump administration’s hawkish key tenets of foreign policy towards the Middle East: 1) seeking to isolate Iran economically and politically; 2) supporting Israel; and 3) continuing to support anti-terrorism operations in the region, albeit otherwise winding down military engagements in the region, including Iraq and Syria.

Although these principles had started to become apparent since Trump took office in January 2017, Pompeo’s speech offered a rare moment of clarity regarding the Trump administration’s foreign policy strategy. However, what may seem as clarity of purpose in Washington will sharpen geopolitical divisions of the Middle East and worsen prospects for stability.

Trump’s strategy will aggravate tensions in Middle Eastern theatres of conflict, particularly those relating to Iran and Israel. Attempts by the US and its allies to confront Iranian proxies will increase the potential for security incidents, either intentionally or through miscalculation. Overall, the risk that a miscalculation triggers another conflict in the region has increased compared to when the nuclear deal was signed two years ago.

Competitive geopolitical relations and aggressive foreign policy postures across the region have increased the number of potential outcomes for the stability of each country and the region. Organisations with operations in the Middle East that want to remain resilient to regional geopolitical shifts should not assume that the status quo scenario will prevail. The Arab Spring and the Qatar dispute have taught us that such sudden changes in the status quo develop quickly and can be quite disruptive to businesses. They can also be quite difficult to predict. Management teams should, therefore, consider plausible variations from the status quo, especially any outlier scenarios that could have a low likelihood but a severe impact on business.

We have identified seven situations that could give way to such scenarios.

1. Iran: Nuclear fallout
Trump’s decision to reimpose broad economic sanctions will reduce Iran’s incentives to comply with the nuclear agreement. The EU is unlikely to be able to prevent European multinationals from exiting Iran. The resulting damage to Iran’s economy will further weaken the Joint Comprehensive Plan of Action (JCPOA), which had eased sanctions in exchange for restrictions on Iran’s nuclear programme. Iran will likely expand its missile and cybersecurity programmes and continue to be involved in regional conflicts, including in Yemen and Syria. The likelihood of the US or Israel conducting strikes on Iranian nuclear facilities will increase if either country concludes that Iran has intensified its uranium enrichment.

2. Israel and Syria: Within striking distance
Given Trump’s outspoken anti-Iran and pro-Israeli policy, Israel will feel that it has greater freedom to act against Iranian forces across the region to prevent it from establishing a permanent military presence in Syria and from arming the Lebanese Shia movement Hizbullah. As Tehran’s activities come under increased scrutiny from Washington, it may feel the need to act pre-emptively against its adversaries. For example, Iranian forces could attack Israeli border areas from bases in Syria.

3. Iraq: Nuisance neighbour
The new coalition government in Baghdad will try to balance its relations with Washington and Tehran when it eventually takes office. However, Iran-linked parties and individuals in Iraq’s political and business environment will complicate business. The US over the coming year will almost certainly impose further sanctions on Iraqi individuals and entities – including political parties and armed groups – that it believes have links to the Iranian authorities. It has already done so several times this year. The US’s attempts to confront Iranian proxies will increase the potential for security incidents involving US forces, as well as its allies and proxies. Some of these incidents could be intentional, though others might be driven by miscalculation.

4. Yemen and Saudi Arabia: Proxy war
Iran and Saudi Arabia will continue backing opposing sides in Yemen’s conflict. Trump will be likely to take steps to increase Iran’s cost of involvement in Yemen, such as increasing logistical and planning support for the Saudi-led coalition that supports Yemen’s internationally recognised government. The US is also likely to call on the UN to condemn Iran over its support for the Houthi rebels. Riyadh will urge Washington to adopt an aggressive stance towards Iran. However, Yemen is the only regional hotspot in which Saudi Arabia will be able to pursue significant military gains at Iran’s expense.

5.Oman: Unhappy medium
Washington’s approach to Tehran will increase international pressure on Oman to distance itself from Iran. The UAE and Saudi Arabia have disliked Oman’s economic, military and political ties to Iran, the sultanate’s facilitation of the nuclear deal, and its support to Qatar throughout the dispute. Sultan Qaboos bin Said Al Said will attempt to maintain his neutrality by using his strong relations with the US and UK and by seeking additional investment from China, India and Qatar to offset any added pressure from Saudi Arabia and the UAE.

6. Bahrain: Enemies without and within
Bahrain supports the US’s stronger position on Iran. The Sunni authorities in the predominantly Shia kingdom have seized explosives that are likely to have been sourced from the Islamic republic. They have also arrested militants who trained with Iranian proxies in Iraq and Lebanon. Three attacks in 2017 were far more sophisticated than previous incidents and showed that militant cells retain the intent to carry out attacks, though the authorities’ security crackdown over the last several years has succeeded in reducing the pace of attacks. Rising tensions across the region could lead to an increased number of attacks against the Bahraini authorities.

7. Qatar: Stuck in the middle
Qatar will increasingly struggle to balance its ties with both the US and Iran as Washington places it under additional pressure to isolate Tehran. Qatar’s relations with Iran have grown since June 2016, when a dispute broke out between the emirate and the quartet of Arab states. However, Doha also wants to maintain positive relations with Washington, so the US may be able to pressure Qatar into reducing its economic ties with Iran.

Trump’s approach to the Middle East will not help to resolve Qatar’s dispute with the quartet. The four boycotting Arab states will remain unwilling to compromise, and Washington has limited incentives to take a more active role in mediating the dispute.

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